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Big Changes Coming With Financial Reform Bill, Growing “Shadow Inventory” of REOs

August 16th, 2010 by Bill Collins Leave a reply »


In This Issue:

Defaults, Foreclosures, Missed Payments Lead to Shadow Inventory

Shadow Inventory:  A CNBC report on August 13th, noted that the number of REOs (real estate owned or repossessed properties) that will be coming to market is not precisely known as they are not reported by the government.  CNBC attempted to come up with a reasonable estimate as follows:

Fannie Mae’s second quarter REO inventory stood at 129,310, Freddie Mac’s at 62,178 and FHA’s at 44,850.  This totaled 236,338 homes (up 13% from the first quarter of 2010 and 74 percent from the second quarter of 2009.

Big banks: CNBC noted that this is “…harder to track because they report REOs in their quarterly earnings reports, but only as values of the properties, not actual numbers of properties. Thomas Lawler, an economist and housing consultant, estimates that by Q1 of this year banks owned $14.5 billion worth of REOs. If you assume a median price of $150,000 for each home, which I think is a bit high but he’s assuming, then you get 97,000 properties.”

Private label holdings: CNBC utilized Moody’s estimate of 203,665, which when tallied exceeds 537,000.  CNBC noted that this does not include other smaller banks and whose numbers are not found in these categories. They reported that Mr. Lawler’s “best guess” is that the total number of REOs is just under 600,000 but rising.

The CNBC report noted that the National Association of Realtors reported that 564,000 homes were sold in June (a figure which included all homes, not just distressed homes) which meant that fewer homes sold than exist in REO.  They went on to note that the number of distressed sales each month were approximately 150,000 meaning that there is a four month supply just of foreclosed properties.  CNBC concluded that:

“Yes, there are plenty of cash buyers out there, looking to scoop them up, but they will do so only at very reduced prices. So here we go again on price pressure.”

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Defaults in Commercial Mortgage-Backed Securities Rapidly Increasing

MBA NewsLink reported August 2nd that Fitch Ratings, a leading global rating agency, stated that cumulative defaults in commercial mortgage-backed securities (CMBS) increased to 9.48 percent in June and that Fitch projected that CMBS defaults would reach 11 percent by the end of this year.

A “master servicer” oversees the administration of the underlying loan in a CMBS and has an administrative function which includes the handling and disposition of problematic loans. When a loan in a CMBS deal is deemed to not have performed as expected, the master servicer sends the loan to a “special servicer.” This special servicer has considerable powers to either foreclose on the loan or modify its terms and conditions.  In their “CMBS 2Q10 Servicing Update”, Fitch reported that:

“The number of loans transferring to special servicing is growing exponentially. As of June 30, 2010, there was close to $92 billion (5,207 loans) in special servicing, representing 12% of total outstanding commercial mortgage-backed securities (CMBS). This is a 25% increase from the $74 billion (4,435 loans) as of year-end 2009 and a 475% increase from the $16 billion (2,019 loans) at year-end 2008. Fitch Ratings expects 15% of the outstanding CMBS, or approximately $110 billion, to be in special servicing by year-end 2010.”  The report noted that the 2005-2007 vintage loans accounted for 84% of all specially serviced loans, by balance and were defaulting at much higher rates than pre 2005 loans.

The Fitch report indicated the following active special service loans by these indicated “trigger events”: 63.2% imminent default, 16.6% monetary default, 3.0% maturity default, 8.4% imminent maturity default, 5.9% bankruptcy, 2.9% other.

By property type, Fitch reported: 30.5% office, 20.6% multi-family, 20.3% retail, 19.7% lodging, 2.8% industrial, 6.1% other.

Additional information about Fitch Ratings can be found by going to: www.fitchratings.com

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Valuation 2010-say yes if you literally want the t-shirt! Luxor Las Vegas, NV – November 8-10 – www.valuationexpo.com

All early registrants will get an amazing early-early bird rate and the “I am a real estate appraiser and it’s not my fault” t-shirt. In order to qualify email us your name and phone number to yes@valuationexpo.com.

Response to Last Newsletter

Barry Wilson, Board Member, Appraisers’ Coalition of Washington, sent us the following email in response to the article titled “Is it Really Possible That Some Mortgage Brokers Could Be Criminals?”

“Bill–
When the Washington Mortgage Brokers Practices Act was amended in 2006 to require Bill licensing of Loan Originators, the Washington Assoc of Mortgage Brokers was fairly confident that there were approximately 15,000 LO’s working. There are now approximately 4500-5000.

Many did not apply because they knew they could not pass the background investigation. Many were rejected after the BI was completed, either because of the nature of their criminal history or their history would not have disqualified them, but they lied on the application.

And I understand that Kansas, Colorado and several other states had similar results when they licensed LO’s.

I wonder how many left mortgage brokers and went to bank jobs so they wouldn’t need to submit fingerprint cards. Under the federal SAFE act, ALL residential LO’s now have to be in the national registry, which requires a BI with fingerprint card.”

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Declines in Market Value Found in Small Businesses as well as Real Estate

On August 8th, the New York Times reported on the problems and concerns of many small business owners related to declining business values.  A link to this article is found here: Finding an Alternative to Selling and Retiring

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What’s Next for Appraisers with the Passage of the Financial Reform Bill

Several weeks ago, the Appraisal Institute hosted the 2010 Washington Appraisal Summit which involved panel discussion amongst more than 230 appraisers, lenders, and government officials on a variety of valuation policy matters, including the Dodd-Frank Bill. Gary Crabtree, an SRA designated appraiser with Affiliated Appraisers in Bakersfield, California took part in this discussion and has kindly agreed to share his thoughts with AppraiserNews.com regarding the implementation of this bill and what appraisers can expect:

“APPRAISAL REFORM IS LAW – WHAT’S NEXT?

With the passage of the Dodd-Frank Financial Reform bill, the appraisal profession has seen the most meaningful reform since the passage of Title XI of FIRREA almost 20 years ago.  The bill has been discussed at length by all parties involved with varying interpretations.  At the Appraisal Institute’s Washington Summit last month, almost all of the “players” were in attendance and actively “networking” to hear interpretations by each of the impact on the affected parties.  The appraisal profession was “giddy” over the results, the banks and AMC’s were in denial and seemed somewhat shocked that this legislation was now law and the Federal Agencies were “in a fog” on how they were going to implement this “monster”.  What’s next?  Over the next 3 months, the “rulemaking” will begin.  This procedure is where the real battle will take place.  How will the law be interpreted by the “rule makers”?  Who are the “rule makers”?  In an announcement yesterday, the FDIC announced yesterday, that there will be an “open door policy” that will make it easier for the public to give input to the rulemaking process via their financial reform webpage at www.fdic.gov/financialreform/Through this site, the appraisal profession can provide comments.  The more comments on a subject, the more likely the “rule makers” will pay attention to the issues addressed. On the other hand, the Obama Administration announced yesterday that the Treasury will host a Housing Finance Forum to solicit input from the industry stakeholders to guide the administration in shaping the new housing finance system.  A source indicated that the White House controlled the guest list, which include the CIO of PIMCO, the world’s largest mutual fund, the president of Bank of America Home Loans, the co-president of Wells Fargo Home Mortgage, the chief economist of Moody’s Analytics and representatives of the National Urban League, the MacArthur Foundation, and the American Enterprise Institute.  What is even more interesting is who was not invited.  They include industry trade groups such as the Mortgage Bankers Assn, the American Bankers Assn, the National Association of Realtors and the Appraisal Institute or any other group representing the appraisal profession. The administration even “snubbed” its own “quasi-public” agency, the Appraisal Subcommittee and members of the Appraisal Foundation who is responsible for the determination of education requirements and appraisal standards.  It appears to me that someone is “speaking with forked tongue”

Probably, the “hottest” topic contained in Title XIV of the Dodd-Frank bill is the definition and determination of “customary and reasonable” appraisal fees. I’m sure that this rule will be the most contested of any other item in the bill.  The bill calls for such fees to be established by objective third-party information, such as government agency fee schedules (Veteran’s Administration), academic studies (of which none exist and will take forever to develop, much less fund) and independent private sector surveys (Ala Mode’s recent fee survey).  All of the above have flaws and will be contested by some group via a law suit that will end up in the court system and not be resolved for years.  May I be so bold as to suggest a simple solution to the problem.  According to a source, Fannie is putting the final touches to a “new” appraisal form, that will include “drop down” boxes for certain fields and a new field for the name of the AMC that ordered the appraisal, in addition to the lender/client.  All that need be done, is the addition of “one” additional field.  That field is the amount of the fee that the appraiser received to complete the assignment.  That field could be “mined” by an appropriate government agency (FHFA or the new Consumer Protection Agency), and a non-biased report of customary and reasonable fees could be published for every MSA in the country.  The reporting could be accomplished by Freddie, Fannie, FHA and VA and would encompass almost all of the appraisals performed for “federally related” transactions.  Since there would be a separate field for the name of the AMC who ordered the report, those fees could be segregated to comply with the law.  My sense is that FHA, VA and the GSE’s will “push back” very hard with respect to this solution.  Why?  Because it is too simple and logical and they don’t want to get involved with implementation of any law, albeit a federal one.  I find it more that interesting, that FHA, VA and the GSE’s can establish rules of what and how appraise real property, but will not get involved in the protection on the very profession that is established to protect the public trust.  “

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Rates & Dates

Historically low interest rates are still available.  Freddie Mac reported that rates for 30-year fixed-rate mortgages declined slightly to 4.44% for the week ending August 12th from the 4.49% of the prior week.

The Mortgage Bankers Association (MBA) in its most recent Weekly Mortgage Applications Survey for the week ending August 6th reported a slight increase to 4.60% from the previous week’s average of 4.57%.

A CNBC report on August 10th noted that while these low interest rates have provided a boost to refinances, it has not been sufficient by itself to bring about increases in the home purchase market, and refinances accounted for 78% of residential mortgage applications.  Many other reports have noted the drag on both refinance and purchase markets created by the combination of stricter credit requirements, property owners who are “underwater” on their mortgages along with those who have tarnished credit ratings due to problems related to economic conditions.

Additional information from Freddie Mac can be found by going to: Primary Mortgage Market Survey – PMMS – Freddie Mac

Additional information from the Mortgage Bankers Association can be found by going to their site at: Mortgage Bankers Association – Research and Forecasts

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Ask Angie

We want to congratulate our most recent winner: Jacob C. Dore, a Certified Residential Appraiser with D.S. Murphy & Associates in Suwanee, Georgia.  Jake was the first person who responded correctly that Oscar Wilde was the author of the quote: “Experience is simply the name we give our mistakes.”

Jake chose to receive a copy of our Directory of Appraisal Management Companies for FHA Appraisers as his prize.  He recently sent me the following note: “Thanks so much-the guide has been a great help so far as I have contacted several companies and have submitted my paperwork to be on their fee appraiser panel”.

Today’s questions:

Who said: “You can have everything in life that you want if you will just help enough other people get what they want.”

a) Zig Ziglar

b) Dale Carnegie

c) Warren Buffett

d) Andrew Cuomo

e) None of the above

And, who said “If the doors of perception were cleansed everything would appear to man as it is, infinite.”

a)Vincent Van Gogh

b) Aldous Huxley

c) Albert Einstein

d) William Blake

e) None of the above

The first person to respond with the correct answer wins a choice of either:

One Free Trade Show Pass or $199 off a Full Conference Pass to Valuation 2010 or

One Free Regular Listing on AppraiserHelp.com

A Free Copy of the Directory of Appraisal Management Companies for FHA Appraisers

Angie’s Hall of Fame: Those who have been crowned winners more than once during the past two years and who have been retired from competition for the rest of 2010:

Suzanne Fahien

Pat Reass

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Tell us what you think!

We invite your responses to any of the issues raised in this newsletter. Please e-mail us at: bill@appraiserhelp.com with your thoughts!

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We really hope you find our newsletter to be informative!  If you have any input on future topics for discussion, please email me your questions and I will do my best to address them in the next issue.  If you want to look back at past issues you can see our archive at www.appraisernews.com

Regards,

Bill Collins, Appraiser Help Inc.

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